Biggest squeeze on household incomes since the early 1980s as families are hit by inflation

Feeling the pinch: The Institute for Fiscal Studies (IFS) found that the income of the average UK household had fallen 1.6 per cent since 2008

The average family is £1 a day worse off than it was three years ago thanks to what is set to become the largest crash in living standards since the early 1970s.

Research ahead of Chancellor George Osborne’s second Budget tomorrow says the typical household has seen its real-terms income fall by £365 since 2008.

Its income is expected to still be lower in 2013 than it was in 2008, making it the biggest five-year drop for more than 40 years.

Families have been squeezed from all sides thanks to slow growth in the economy, high inflation and tax and benefit changes to help restore the public finances.

Pensioners are among the hardest hit because of falling returns from savings. The typical pensioner household has seen its real annual income fall by 2.4 per cent (£456) since 2008, according to the Institute for Fiscal Studies.

But the biggest losers are the richest tenth of households, who are 3.8 per cent worse off in real terms than they were in 2008 – a loss of £2,230.

Families face further hikes in National Insurance next month and
reductions in the higher rate tax allowance, following the increase in
VAT to 20 per cent at the beginning of the year.

Share this article

Share

The
Chancellor is expected to ease the burden on basic rate taxpayers by
further increasing the income tax threshold, already being raised by
£1,000 from next month, in tomorrow’s Budget. However, this is expected
to be paid for by reducing the higher rate allowance.

'WE DON'T SAVE'

Supermarket worker Tracy Castano and her family have to follow a strict budget to ensure they do not fall into difficulty.

Mrs Castano, 31, lives with her husband Steve, 32, and their three-year-old daughter Libby, in a three-bedroom semi-detached house in Coventry.

She earns £6,000 a year working 18 hours a week at Asda, while Mr Castano earns up to £24,000 as a glazier.

That leaves them with £1,750 a month after tax – the UK average. They spend £400 a month on food, including the odd meal out and a takeaway, and pay £479 on their mortgage and £100 towards a £7,000 credit card bill.

Mrs Castano said: ‘We live day to day and don’t save anything. If we have something big coming up like a birthday or a holiday, then I have to put in a lot more hours at work.

‘I have noticed a massive difference in the price of my supermarket shop. There is just no money left over at the end of the month.’

Mr Osborne is also expected to cancel fuel duty rises announced by
Labour and signal a move towards a ‘fair fuel stabiliser’, a system
which involves duty falling as oil prices rise.

Yesterday’s
IFS report, for the BBC, showed that changes in benefits and direct
taxes since 2008 have actually increased the income of typical
households by £120 since 2008.

Only households in the top fifth and the bottom tenth of the income scale have on average lost out from benefit cuts and direct tax rises. However, the figures do not include VAT, an indirect tax which has hit everyone in higher prices.

Overall, the IFS said, most people’s after-tax income had fallen behind the real cost of living by about 1.6 per cent a year since the financial crisis began. By contrast, for most of the previous 50 years, the middle-income household’s income increased by the same amount – 1.6 per cent – each year.

Families with children have seen their average income fall by 1.1 per cent, or £233 a year. They would usually have expected income to rise by £1,060 a year.

IFS director Paul Johnson said: ‘Given what the Office for Budgetary Responsibility is currently forecasting about earnings, and given what we know about the Government’s plans for tax rises and benefit cuts over the next couple of years, it certainly looks like it’s going to be a couple of years before we start to see incomes rising.’

A ComRes poll last night found that nearly two thirds of the public – 64 per cent – think the coalition Government does not understand the problems faced by ordinary British families in the economic climate. Just 24 per cent think the Government has an understanding and 12 per cent are unsure.